Bank analysts and dealers have pared down their targets for offshore renminbi, or dim sum, bond issuance for 2012 after sales in the first half of the year missed targets. Dealers, however, expect a heavier flow of issues in the second half with a focus on investment-grade quality.
Issuers have sold US$5.58 billion worth of dim sum bonds in 2012 year to date across 39 deals, according to data provider Dealogic. This compares to the US$5.67 billion sold in the same period in 2011, across 37 deals.
While dealers and analysts say that issuance into the market has been steady in 2012, the pace of bond sales has not met expectations.
“Issuance has been slower than we had expected in the start of the year, largely because of the risk-off market sentiment. We’ve revised down our forecast of dim sum issues throughout the year to Rmb150 billion, from the earlier expected Rmb200 billion,” Frances Cheung, senior fixed income strategist in Asia ex Japan at Crédit Agricole.
“Dim sum bond issuance - excluding CDs - was Rmb28 billion in the first quarter and Rmb14 billion so far in the second quarter. [Including] the expected Rmb30 billion from the Ministry of Finance (MoF), that amounts to only Rmb72 billion,” added Chueng. “So our forecast of Rmb150 billion needs an obvious pick-up in the second half. Risk is to the downside.”
Lisa O’Connor, director of renminbi internationalisation at Society of Worldwide Interbank Financial Telecommunication (Swift), says Swift’s clients also anticipated 2012 issuance to be several times’ 2011 sales, which hasn’t yet materialised.
“Market participants that we’ve spoken to expected three-to-five-times growth in the dim sum market this year. However, those numbers that we’ve seen for 2012 so far are not meeting the expectations,” she said. “People do think that issuance will pick up in the middle of this year and that we’re going to see a lot of the take-up in the third quarter. We might be behind at the beginning of the year but there will be pick up.”
In 2011 full year dim sum sales equalled US$13.88 billion, meaning growth three times would have delivered full year volume of US$41.64 billion.
However, despite volume falling below expectations, dealers say that 2012 has been a notable year for the market’s development. Namely, the quality of debt available in the market has improved with sales from investment-grade issuers from a wider geographic spread.
“I don’t feel there’s massive story in how the market has grown in size, but there is something to say about the quality of the market,” said one Hong Kong-based debt syndicate banker. “Last year was full of disappointments in that we had a bunch of shitty issuers coming to market. Investors don’t want those lower-quality credits – they say, ‘we want bonds with ratings and covenants that protect me’.
“But in 2012 issuers have had ratings and strong covenants and a lot of the deals that have been announced have been of better quality, they’ve had roadshows, were priced and got done,” he continued. “You’re now seeing international names as well as Chinese names, and deal sizes that seem fairly respectable. This has helped to encourage better participation from global investors, from geographies like Europe. What we’ve seen this year has helped cement dim sum’s status as an asset class in the vein of the Eurobond.”
These include names such as América Móvil, Emirates NBD, Raiffeisen Bank, Lanxess, Ford and Korea Development Bank (KDB), which have helped gain attention for the dim sum market. These issuers tapped the market to for renminbi capital-raising purposes for their clients and to fund their onshore businesses, as well as arbitrage opportunities, swapping the currency into dollars.
Dealers anticipate more of these quality issuers to tap the market the remainder of the year, as well as a pipeline of bonds issued by Chinese agencies, state-owned enterprises (SOEs) and policy banks.
“We’re expecting more issuance in the second half of the year, with many by Chinese names,” said a renminbi business development banker in Hong Kong. “Quotas were being granted for Chinese companies and banks earlier this year, and many haven’t yet come to market. So we do expect more Chinese entities to come to market, and it’s rumoured that the MoF will come again in July so I think in the second half of the year the supply will be still quite strong.”
Earlier in the year, several banks received licenses to issue, and while names such as Agricultural Development Bank of China and China Construction Bank have sold bonds, Industrial & Commercial Bank of China and Agricultural Bank of China have stayed away.
Chinese corporates, which the National Development and Reform Commission (NDRC) in May allowed for easier access to the dim sum market, may also begin to sell, which will add another dimension to the dim sum pipeline.
“Whenever there’s a rule change it takes a while for both issuers and banks to figure out what it all means, but later in the year we can see more sales,” said Swift’s O’Connor. “I don’t think [Chinese issuers have held off issuing] because of the macro economy or the eurozone because there is demand for this debt in the market. It’s more waiting around the loosening of regulations and finding out who can now issue these bonds. It takes a bit of time for people to get on their feet.”
However, that the ongoing convergence between onshore and offshore rates has made the dim sum market less appealing for mainland sellers. Yet Crédit Agricole’s Cheung explains that the offshore market does continue to be cheaper for shorter-tenor bonds, and this will support mainland issuers for the remainder of 2012.
As an example, the MoF’s three-year offshore bond issued in August 2011 pays a coupon of 0.6% at the time, compared to the 3.6% that it would have to pay onshore. Nearly one year on, the bond is trading at 1.5%-1.6%, compared to 2.5% for its comparable onshore issue.
“Now that’s less than a 100 basis points (bp) spread – not the 300bp that we saw before,” she said. “But that’s still a sizable spread. It’s narrower, but still positive. That’s still ok for Chinese issuers.”